Feature: Myths and the Market
Investors are betting on my death. In a sense, that is true. However, it isn’t a bet that’s directly linked to you. Investors buy pools of life insurance policies – groups of policies from a number of policy holders. Those policies share similar characteristics, such as age, health history, policy death benefit amount, etc. All of the policies are sold based on this information only – investors will never know your name. The investors offer a price for that pool of policies that is above the collective surrender value of all policies, but below the actual death benefit. In other words, if your policy’s death benefit is $1 million and the surrender value is $250,000, investors weigh the life expectancy, premium costs, and death benefits to determine how much over the surrender value they will pay for your policy. They take over premiums, you get your benefit now, and they do take the chance that you will outlive your life expectancy.
I will receive huge financial payouts for selling my policy. Not always so, though you will receive much more in a life settlement transaction than you would by surrendering your policy to your insurance company. The life settlements market doesn’t have a guaranteed percentage payout. Like other investment markets, the amount of the payout you receive is based on several factors, including the amount of your policy’s death benefit, the number of policies for sale in the market, the average return of similar life settlements packages, etc. It is safe to say that the life settlements market can offer you an average return between 8 and 15 percent above the surrender value. In times where there are more life insurance policies for sale, the number will stay low. When there are fewer sales on the market, that percentage could increase.
Life settlement investors want my policy only if I’m not going to live long. Not so. Investors tend to pay much more for policy pools with short life expectancies. A better investment balance that includes seniors whose life expectancies are longer in nature are more appealing. Investors can give a fair price to the seller, though they do take on more risk that the pool of insureds will outlive the longer life expectancy periods.
Life settlements are illegal. False. Life settlements are legitimate ways for policy holders to sell unwanted or unaffordable policies. Since life settlements are governed by the same laws that insurance companies must follow, they are considered a safe means of attaining much-needed cash for whatever your purpose.
I must use the proceeds of my life settlement agreement on funeral or estate needs. False. You can use your payout for whatever reason you want. You can save the money, invest it, or spend it as you see fit. Be aware that life settlement payouts are taxed whereas life insurance death benefits are not.
Life settlements are too new and risky to be trusted. The life settlement transaction has been around in some form since 1911. First used to help terminally ill policy holders pay for their medical care, the market has become a viable option for seniors who can’t afford their premiums, need emergency cash, or who no longer need insurance coverage.
The life settlement market is risk-free for the seller. The life settlement market is not without risk to the seller. Because payout amounts are not guaranteed, the only way to tell what your policy is worth is to offer it for sale. Also, some brokers sell and buy life settlements. This creates a conflict of interest – a broker who sells himself your policy is not going to look out for your interests. You should choose a broker who follows NAIC insurance regulations and who acts solely as a selling agent for your policy.
Understanding the facts of life settlements can help you to choose the best possible option for your lifestyle. Choose a broker who will offer you all options and explain thoroughly what to expect.
Clark Hogan is the Managing Director of Opulen Capital in La Jolla, California.
